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"In order to provide income in retirement, it
is important to set the right goals for investor
portfolios and structure portfolios to meet those
goals," said Merton.
"For retirement income, managing the volatility
of that income in retirement is more important
than managing the volatility of capital. A portfolio
specifcally designed to meet such a goal will
improve performance over standard generic
investing strategies.
"People are told it's all about net worth when
what they need is monthly income. What people
care about is the standard of living they will have
in retirement and that is not defned by a pot
of money. It is defned as a stream of income,
particularly for working and middle class people
who don't have lots of wealth."
Merton insists on redesigning defned
contribution plans so they more closely resemble
the old defned beneft plans that gave people
surety of income in retirement.
“The problem is the defned contribution
system that Australia and other developed nations
have embraced in recent years frame the entire
challenge around assets and returns. As we saw in
the GFC, that's not a good metric. If your goal is
income in retirement, investment value and asset
volatility are the wrong measures," said Merton.
Merton believes the onus is on the super
industry to gear the goal around retirement
income, rather than lump sums, and give people
meaningful information on reaching those goals.
"Funds have to give people meaningful
information and meaningful choices. For example,
if you are running short of your retirement income
goal, there are only three things you can do --
save more, work longer or take more risk. And if
you take more risk, you have to be aware of the
possible consequence and that is you could end
up with even less," said Merton.
"Moving to an income-focused super strategy
means funds are going to have to change how
they engage and communicate with members.
Instead of asking people technical questions, like
how much debt versus equity do you want, funds
should start by asking people what their income
goal is and then show them how they are tracking
towards it.
"Rather than trying to make people smarter
about investment, we need to have a smarter
conversation with them that gets to where they
want to be."
Superfunds September 2016